What happens when the Internal Revenue Service decides to rewrite a law to “fix” legislation that the president himself signed? King v. Burwell, that’s what. Tomorrow morning, the parties will argue the biggest case of the Supreme Court term.
King centers on the IRS’s decision to issue a regulation rewriting a key statutory provision that limits Obamacare’s subsidies to individual plans purchased on an insurance exchange “established by the State.” Although King doesn’t present a constitutional issue in the conventional sense, you don’t have to scratch hard to find one underneath. Because the Constitution allocates legislative power to Congress alone, the Obama administration’s attempt to turn statutory interpretation into legislation by other means strikes at the heart of the Constitution’s separation of powers.
The story begins in 2010, when Democrats passed the Affordable Care Act on a party-line vote by the thinnest of margins. Although many Democrats were hoping for something more ambitious, Senate Democrats lost their ability to override a filibuster on party lines after the intervening special election of Republican Senator Scott Brown (Mass.) a few weeks after the House of Representatives voted on its own bill. But the House bill was dead in the Senate once Senator Brown arrived. As a result, the Obama administration was forced to accept a Senate bill that gave substantial power to the states.
The Senate bill was structured around a notion called “cooperative federalism,” in which Congress provides a variety of incentives to get states to do what Congress wants them to do. (This is typically something they won’t do on their own, such as environmental regulation or Medicaid.) Since the Constitution prevents Congress from ordering states around (they are sovereigns, after all), Congress must use carrots and sticks. A typical carrot might be, say, making a new pot of taxpayer money available in exchange for states’ cooperation. A stick, by contrast, might be revocation of federal funds or the imposition of unfavorable federal regulations on the residents of an uncooperative state.
With Obamacare, the centerpiece of the cooperative-federalism vision is state-specific insurance exchanges, each a miniature version of Healthcare.gov. The exchanges are so central, in fact, that the Affordable Care Act orders states to create them (even though the government has never tried to enforce that particular verbiage). If a state refuses, the federal government establishes a federal exchange for plans bought within the state.
Like other cooperative-federalism schemes before it, Obamacare includes carrots and sticks. Carrot: Congress increases funds for states that complied with new coverage requirements for Medicaid. Stick: Any state that fails to provide the expanded coverage loses all Medicaid funds, not just funding for expanded coverage. (This provision was subsequently struck down in the first Obamacare case that went to the Supreme Court, National Federation of Independent Businesses v. Sebelius.) Carrot: The IRS will grant tax subsidies to reduce the cost of overpriced individual insurance plans on the state exchanges. Stick: The IRS will impose tax penalties for those who fail to purchase an exchange-compliant plan (the individual mandate). You get the idea.
King concerns one other particularly important provision applying to individual plans. Individual purchasers who buy their plans on exchanges get a subsidy that depends on whether the plan was bought on what the statute calls an “Exchange established by the State.” You may remember the words of Obamacare architect and MIT economist Jonathan Gruber, who in 2012 described this provision this way [emphasis mine]:
So these health-insurance Exchanges . . . will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law, it says if the states don’t provide them, the federal backstop will. The federal government has been sort of slow in putting out its backstop, I think partly because they want to sort of squeeze the states to do it. I think what’s important to remember politically about this, is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits. But your citizens still pay the taxes that support this bill. So you’re essentially saying to your citizens, you’re going to pay all the taxes to help all the other states in the country. I hope that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these Exchanges, and that they’ll do it.
In other words, the tax credits or subsidies act as both stick and carrot to create a political incentive for states to set up their own exchanges. Hardball, this Obamacare stuff.
Usually, carrot/stick schemes work: States capitulate, individuals make utility-maximizing choices to follow the incentives, and Congress gets what it wants. For Obamacare, then, Congress gave little attention to what would happen if states didn’t participate. It budgeted woefully insufficient funds for the federal fallback exchange under the assumption that every state would jump at the chance to create its own.
Obamacare, though, was different from other cooperative-federalism schemes. It quickly became clear that the divisive law was actually discouraging participation by states, particularly red states where it was deeply unpopular. Although the IRS initially drafted proposed regulations that agreed with the plain text of the law, agency political appointees eventually realized the threat to Obamacare from states refusing to participate: They could make it even less popular. Without subsidies, people might not continue to pay for overpriced Obamacare-compliant health insurance. They might choose to pay the penalty and buy cheaper insurance that, although non-compliant with Obamacare, was still adequate for their needs.
With these concerns in mind, the IRS issued a final regulation declaring that “established by the State” did not really mean “established by the State.” Voilà: Tax subsidies would henceforth be available on exchanges established by the federal government in addition to those “established by the State.”
The problem, of course, is that the IRS was rewriting the law to protect Obamacare. The tax agency spent less than a page explaining its changed interpretation, even though agencies routinely kill forests of trees documenting less significant reversals and the new “interpretation” could result in literally billions of dollars in new tax subsidies without congressional authorization. But this is Obamacare, so (at least from the administration’s perspective) the normal rules don’t apply.
The plaintiffs in King challenged the IRS’s rewriting of “established by the State” because, well, it’s illegal. On their side is the plain text of the law and the fact that said text makes perfect sense in light of Congress’s hunger for cooperative-federalism incentives. Also on their side is the fact that courts typically interpret statutes from the center-out: They start with plain words and phrases. As they work outwards from plain words, a court might find ambiguous provisions, errors, or contradictions that slightly modify the meaning of the plain words.
The government’s primary defense is that “established by the State” really means “established by the State or the Department of Health and Human Services.” To the government, “established by the State” is not to be taken literally, but is instead a “term of art,” which effectively turns the phrase into a symbol that can be redefined however the Court likes (although they’d prefer it include exchanges established by HHS). The problem, obviously, is that this interpretation detaches the actual meaning from the words of the detailed statute.
Not to worry, the government argues, it shouldn’t matter that the plain text is clear; it might create conflicts in other parts of the statute if the plain text is applied there as written. But statutory interpretation prefers clarity, not ambiguity. This means that courts don’t go around borrowing ambiguity from other parts of a statute into the parts that are clear. And in this case, “established by the State” is really, really clear.
Whatever the result, the Supreme Court’s decision will resolve a disagreement between the lower courts. The Fourth Circuit affirmed the regulation in King on the same day last year that the D.C. Circuit struck down the IRS rule in Halbig v. Sebelius. Two other cases, one involving Oklahoma and the other involving Indiana, have been paused pending the outcome of King and have yet to reach appeals courts. If the Supreme Court strikes down the IRS rule, the ruling will apply nationwide.
At oral arguments, pay close attention to Justice Scalia’s lines of questioning. The Court’s most loquacious justice loves statutory interpretation (he has written several books and essays on it, after all). Also, Justice Alito is an expert in creating difficult and entertaining hypotheticals, a skill he no doubt developed as a law student under the tutelage of the Socratic method.
Also watch Chief Justice Roberts. As in NFIB v. Sebelius, the Left has launched a massive public-relations offensive to try to influence his vote. The Chief reportedly reversed his vote in that case after oral argument, so the Court ended up affirming Obamacare’s individual mandate. I wouldn’t expect to see that happen again, though. The Chief knows as well as anyone else that he can never win with the Left: If he gives in to pressure now, he’ll encourage more of that sort of thing; if he doesn’t, he’ll be demonized as a partisan. Either way he loses, so he probably won’t tip his hand.
Finally, pay close attention to the questions of the liberal justices to see how closely they are attuned to the statutory text. Some of the opinions in the lower courts relied on an unbelievably general conception of the law’s policy objectives to resolve some of the statutory interpretation questions, so it will be interesting to see if the liberal justices are inclined to follow that approach. Also, many of the pro-government amicus briefs practically abandoned legal arguments in favor of the IRS rule, instead predicting that Obamacare would come crashing down if the plaintiffs win. If we’re lucky, we will find out how committed the liberal justices are to interpreting the laws that Congress actually passed, as opposed to the ones they wish it had passed.
— Jonathan Keim is counsel for the Judicial Crisis Network. He is a former federal judicial clerk, criminal litigator, and information-systems professional.